Nonsense posing as wisdom

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Every day we hear politicians and pundits say that government spending cannot lift the economy out of the worst slump since the 1930s, which is as sensible as saying that 2-1=3 or that water and flour make steak.

Those who said after President Barack Obama’s speech last week to Congress that government does not create wealth, does not create jobs and cannot stimulate the economy spoke nonsense. So do those who say that only private business creates wealth, as if any revenue going to taxes destroys wealth.

Adam Smith, who figured out market capitalism in his 1776 book “The Wealth of Nations,” could set them straight. We have plenty of equally competent economists who understand these issues today. They just do not get the attention that the news media lavish on high-profile politicians and pundits who speak with absolute certainty on matters about which their words show they know nothing.

So why are politicians and commentators who speak economic nonsense treated as sages? And why do so many journalists uncritically repeat their nonsense?

Sadly, the answer is that too few people in public life understand economics, numbers or algebra. Too few people learned, or remember, the crucial concept underlying matters of economics and finance known as accounting identities.

ACCOUNTING IDENTITIES
Accounting identities are statements that must be true no matter how you arrange the components. Thus 2+1=3 just as 3-1=2. Likewise, net worth equals assets minus liabilities just as assets equal liabilities plus net worth and profits equal revenue minus costs. But water plus flour does not equal steak.

Economics is like a circle, as Smith figured out 235 years ago. More spending by government creates jobs, whether at war plants making smart bombs, dredging ports so cargo moves efficiently or stimulating the gray matter between young ears to create productive adults. Bombs ultimately destroy value, while ports and education add value.

Now, refreshed on the bedrock economics of accounting identities, consider these statements by three prominent Republican lawmakers:

“We need to cut spending now in order to create jobs in America” — House Speaker John Boehner on the floor of the House of Representatives in July 2010. “If government spending would stimulate the economy, we’d be in the middle of a boom” — Senator Mitch McConnell in March 2011. “Government doesn’t create jobs, you do” — Representative Nan Hayworth, M.D., speaking in January to business leaders in her New York district.

None of the comments makes sense. The first violates the accounting identity that spending equals income. The second assumes that the stimulus was big enough to make up for the fall in private sector jobs, when it was less than half what accounting identity algebra showed was needed. The third is just plain nonsense.

JOBS ARE KEY
It is certainly true that jobs are key. People with jobs are taxpayers, while those without tend to become taxeaters. More wages mean more spending, which is income to others.

As John Maynard Keynes observed in 1932: “There is no possibility of balancing the budget except by increasing the national income, which is the same thing as increasing employment.”

None of this means that President Obama’s jobs package, which has no hope of becoming law, is the optimal approach. It relies, however, on sound principles.

On the other hand, creating jobs that cost more than they add in value destroys wealth. That is why a defense plant for which Senator McConnell wants to get a federal loan guarantee of $1.7 million per job makes no sense economically.

We also inhibit future wealth when we fire teachers, let roads fall apart so that truck traffic slows and repair bills rise, and ignore weakened dams whose collapse would destroy property and lives. Cutting research funds just sends researchers to China and India, along with future fortunes.

Investing in education, research and infrastructure all add to economic inputs and, in turn, increase economic outputs.

In general the market does a better job of allocating capital for investment than government does. But when the market fails, as with the unregulated insurance and bad loans that destroyed so much value in the last decade, then the only way to stop the vicious cycle of decline is for government to temporarily make up the difference through more spending. Saying otherwise is the economic equivalent of arguing that water and flour make steak.

Mr. Johnson may need a refresher course in economics. His thesis statement lacks rational thinking. If I were grading his paper he would not receive a grade and make him redo the paper with an outline of his points with three credible sentences to support it.
The addition statements lead the reader away from the question who makes jobs? Mr. Johnson the American colonies had a flourishing economy before the US government was formed.

The author’s approving reference to Keynes, one of history’s great charlatans, should suffice to dismiss both him and this article. But the underlying fallacy, that spending creates wealth, is popular enough that it ought to be answered.

The author here puts mathematical formalism over causality, asserting that we can increase our national wealth by shifting more of it from one class to another. But this doesn’t work: mathematically, my paycheck is equal to my taxes, plus what I save, plus what I spend. But that does not mean that I increase my paycheck by increasing my spending; it means that if I increase my spending, I decrease my saving.

Similarly, every single dollar of government spending is a dollar taken away from private spending. If the money comes from taxes, it probably reduces both consumption and saving. If it comes from borrowing, the dollars are taken away from saving, which is to say that they are taken away from capital spending.

The simple fact is that consumption always makes us poorer. After I consume a loaf of bread, I have less bread than I did before. Usually, of course, you have to consume wealth to produce wealth, but it is always the production, not the consumption as such, that makes us richer.

Economists are whores hired by politicians to push a particular point of view, masquerading as science. Politicians know very well how to fix the economy, but their masters, blinded by greed, refuse to let go. Hence, they are trying to screw our minds with the scientific nonsense. However, the solutions would require someone to part with money, and that is why there is a tug of war between different factions, to see out of whose pocket the money will come out of. Take, for example, health care. We all know that the solution would mean single payer, which is what will be best for the economy. But this will mean that money will come out of insurance companies’, or drug companies’, pockets. It is all about greed. That is the only element driving our economic system, which is called capitalism, the foundation of which is greed. We all want someone else to pay for what needs to be done.

This is a great article. I’m glad someone is stepping up to point out that these misguided politicians are relying on sensationalism and a brand of logic seemingly derived from reality TV programming. We need more visibility on this issue.

” stimulating the gray matter between young ears to create productive adults.”

I would hardly call Obama a productive adult. Just a very expensive Community Organizer.

He is taking one equation (1 +2 = 3) and trying to apply it to all figures. We quotes one statement from Wealth of Nation and think that it applies universally.
What he has forgotten is the Law of Diminishing Returns. We already spent $10,000. student when no other nation spends more than $6000 per student. Is adding more money going to make them more productive adults? No, just more expensive ones, The Law of Diminishing Returns dictates that it will not.

While it is true that 1 + 2 = 3… that does not mean that 1 trillion + 2 Trillion = 3 Trillion, especially when the 2 trillion is filtered through a government bureaucracy.

GDP may include government spending, and the numbers may add up to the same sum but they sure FEEL different when the government spending is less. Does a 1% growth FEEL prosperous when it is all generated by government spending? I should say not. And Reagan’s legacy is how he made people feel.

The problem with government spending earmarked for business goals is that it tends to be inefficient via-a-vis the private sector in creating real economic value. Government spending can create worthwhile outcomes, but it’s subject to lots of political forces and horse trading that create waste, i.e. congressmen want to make sure their district gets a piece of the pie even if it’s inefficient to do so.

Consumption is key, the trouble with consumption is that the earth has a limited set of resources to consume. So consuming like Americans (read wasteful obese consumption [like say Hummers]) is now running up against the earths limits with 7 billion people. The only remedy that business or government has offered thus far is denial of that fact. Denial is not a sound foundation for an economy. The endless growth model has failed and no one has noticed. Are they putting stupid in the water?

OK, if all this is true, where the heck are the jobs that the suboptimal stimulus was supposed to create? Even if you buy the premise that government spending translates to income and, thus, jobs in the great economic “wheel of wealth,” isn’t there a more efficient way to create jobs? One that doesn’t inflate the currency and burden future generations? How about government partnering with private industry to grow, for example, online gaming or knock down barriers to true energy independence through less regulation on natural gas hydraulic fracturing? Government doling out cash to create few jobs is arguably as destructive to economic “value” as is spending that money building bombs and tanks.

Excellent article! Of course the Gordon Geckos of the world will call it rubbish. They also want us to believe if the top CEO’s had their TOTAL compensation dropped from 25 million to 18-20 million………..they would all quit and go elsewhere…………duh….where?

Fallacious nonsense. Mr Johnson, government stimulus spending certainly lifts the economy, but the money has to come from somewhere. If it comes from borrowing then we are spending tomorrow’s wealth; we have to take the pain a few years later. If we print the money we debase the currency and tax ourselves with rising costs. Wealth doesn’t materialize out of nothing. It doesn’t just appear when the government takes on more debt to stimulate. You want to tell us about economic fallacies? Give me a break.

It’s a shame that almost no one on the Republican side (save for some of the inspiring Libertarians like Ron Paul) understand how tragic the US “defense” spending is. For a Republican to say “We need to cut military spending because it’s a drain on our economy” would be political suicide, regardless of how true it is or how much the nation needs to hear it. They can simply say “I support our troops!” and go on approving of ever larger military budgets and no one on the Right bats an eye. Truly disturbing.

Fantastic article! Its simple brilliance in getting the basics of economics right for lay people, is what we really need right now. One should not be surprised with politicians who echo consistently “sound-bites” crafted by advisors in the employ of their BIG pay masters, and propagated by a ruthless propaganda machine, which repeats the very same sound-bites to legitimise and enforce the messages coming from those politicians!

Can the government create jobs? Sure it can. But are these jobs beneficial to our society? Some are and some aren’t. The problem with government jobs are that some of them are useless and provide zero value to the country’s well being. These jobs are not hindered by the free market and will go on forever even if they do not provide any value. On the other hand, jobs created by private industry will either have value or go away mighty quickly replaced with something more efficient with value.
Mr. Johnston quotes Keynes, but I wonder if he’s read anything by Thomas Sowell? Edmund Burke? Friedman? Or Hayek? I wonder if he thinks their wisdom is nonsense.

We are in a credit contraction cycle…..you can print money all you want but it only drives up food and energy costs and makes it even more difficult for the poor in this country as well as in third world countries. We are in for hard times for the next few years . Blindly throwing money at our problems may get people reelected but it will not fix our structural problems

Senator McConnell’s defense plant that he mentions is exactly why government spending is not the best solution. – Would any private employer spend 1.7 Million to create a job? If the government takes that 1.7 million in taxes and creatges a job, then we lose the many jobs that would have been created had the 1.7 million been invested or spent by the citizens who paid the taxes.

The economy would grow more quickly with the 34 jobs at 50,000 per job than the 1.7 millions.

government spending is driven too much by ‘social goals’ that usually do not succeed as planned, or pork spending that is inefficient and wasteful for the american economy as a whole.

Let the people spend their own money, let government focus on its true national responsibilities, not social engineering.

Amen! (I see the hedge funds and tea partiers weighed in in the guise of Elktrobahn.)

I’ve been asserting these very same points since ’06, when I finally saw the trajectory the U.S. was on. And the author is correct in that the MSM and the owned politicos simply won’t, or can’t, speak the hard but simple truths addressed in this piece.

However, I do differ about the statement that the bail-outs (stimuli) were not big enough. That wasn’t (isn’t) the problem; the problem was printing fiat money and handing it to the non-producers in the name of market “liquidity.” The stimuli were mis-directed toward their financial masters, rather to infrastructure, research and education. I see Obama had the sage advice for the EU, to set up a larger bail-out fund for European banks. Because, you know, it worked so well here.

Part of the stimulus money was spent putting walk-don’t walk signals at an intersection in my rural town. The intersection crosses a 4 lane state highway that had a red light already in place. The red light system was replaced with a new camera operated red light system. On one side of the highway is a poultry plant, the other is a wooded, totally undeveloped area. The people I observed actually doing the work were all hispanic. I hope that they were all here legally. I’m sure jobs were created, but they were a waste of resources that could have been spent on something more beneficial. It does seem that governmnet projects that spend other peoples money generally are much less efficient than people who spend there own money. Our government has become a bloated oparasite on our economy and needs to be shrunk. It should provide for defense, standards, and laws. Once that is done, it should stand aside and allow the free market system to do what is supposed to be done.

Johnston ain’t talkin’ about monetary policy, he’s talkin’ about fiscal policy. Get on the train man and try and keep up.

The reason the Fed had to step in (with the print money monetary policy you’re complaining about) is because the Congress failed to exercise responsible, stimulative fiscal policy. Fiscal policy well spent and of appropriate size will do much more to move an economy into growth than will monetary policy, but the Fed’s loose policy is better than nothing and right now is the only thing keeping us from sliding into deflation.

History has taught us over and over that the most direct way out of deep recessions and depressions is to spend your way out; good old WPA style. Instead of bailing out AIG, Goldman and Merrill, let’s spend a trillion dollars on roads, schools, ports and infrastructure, we’ll be glad we did.

Neat article. As someone who understands math, I simply cannot fathom how people can drink this Tea-Party Kool-Aid. Is it that they have lost their mind, or is it that no critical thinking is applied, when your social context inclines you to a certain ideology. They say the brain is wired for survival, and ignores reality at critical times. Just goes to show how easy it is to influence a large section via targeted faulty Tea-party propaganda.

@zotdoc – There was a time when I subscribed to the dogma that private institutions were more efficient than government. Your summation serves to illustrate what I’ve observed for decades. Private firms work on the cheap, perhaps taking less qualified workers and certainly working less efficiently, only to deliver less for a higher cost.

I’ve spent part of my working life in defense where I worked around lots of government and Pentagon types and I’ve spent time in the private sector. The mindset in each world is very very different. Government types will pay lip service to bang-for-the-buck rationale, but the reality is they tend to make decisions based on safety/job preservation motives. Risk is to be avoided, CYA is a big player. In the private sector, bang-for-the-buck arguments drive a majority of the decisions, risks are taken if the risk-reward is appropriate. Failure is tolerated as long is it’s not a recurring pattern. Net-net, I trust the private sector management mindset a lot more than I do the government.

Mr. Johnson, take an economics course and learn that people react mostly to EXPECTATIONS and TRUST. In other words, people are not stupid and already calculate TAX INCREASES and MISERY in that are ahead because they KNOW the U.S. 10 % lending is not sustainable for long.

Jee, this is second year Bachelors. Please google EXPECTATIONS THEORY and learn.

This is the trickle effect that got us into ths screwed up economy. Government lowered the requirements to get a mortgage – Wall Street packaged it and sold it as investments and the whole house of cards fell – totally screwing up out economy. Add some profligate spending – by both parties – and you have a recession. The problem with government spending is that it takes taxes to pay their salaries and the private sector is better equiped to handle just about anything the government touches. The answer is not to double down on the government – because not there are contracts out there that the bureaucrats have to hand out to cronies with little or no accountability. It’s like making a healthcare plan and passing out waivers. The quicker we take the money out of politicians hands the better of we will be. There isn’t enough time to tell the real world problem of government run entities. JUst keep the playing field open and fair – don;t stick you hands in it. We are entrenching our economy in the mire of bureaucracy.God help us…..

Government can’t create jobs? Those New York City Employees — firefighters and police — everyone was worshipping two days ago are not volunteers. Why don’t you come to Queens and tell those guys they don’t have real jobs.

Many people saw this movie as a paen to a future model of America in which scientists of any ilk are moot and idiocy reigns supreme.

Here we have an economist, David Cay Johnston, like cohort Paul Krugman who is willing to talk economic basics while surrounded by unnamed “economists” who blabber narrow-minded ideologies in the name of economics. Most reporters and politicians can’t distinguich the difference, nor are they even interested in the truth.

While 2+1 may equal 3 in the mathematical sense, dear sir; it does not mean that 2 has a weight of say, 5 and 1 has a weight of 4. In which case, 3 is equal to 9! You see, in economics, there are things called multipliers, and “economies of scale”. Its pretty apparent after reading your first paragraph that you have absolutely no concept of these basic economic principles!

If our free-market economy would have been left alone by the charlatan (as one poster so well described him), John Maynard Keynes, then yes, the economy IS and SHOULD be like a circle. But it is not. It is more like a Venn Diagram of many circles, overlapping. Overlapping produces qualifiers and quantifiers–which in turn, create INTRINSIC economic instability. My belief is that this instability is there for a reason, and it is one reason alone: Justification for government interference. Without government spending, the Venn diagram of Keynesian economics would morph back into the circle Smith described. However, with government spending, this diagram is a self-multiplying organism with its own food source–OUR money! Our economy has intentionally been made complex to justify regulation and justify monetary interference. You see, its not about non-sense, as so much as using deductive logic. Your theory just isn’t logical.

The guy who said that production drives wealth has not studied modern economics or its history; he’s espousing exactly what Marx and Engels said, which is one of the intellectual schools Keynes analyzed–and ultimately discounted–when devising his general theory of income. Demand pull is the main component of GDP which creates wealth.

All you have to do is look around to see the order and stability created by public infrastructure and institutions. Without them, businesses would not invest in factories or stores. Far fewer people would have jobs and the quality of life would be much lower. Leaders should actually lead us and tell us what needs to be done, instead of pandering to the silly idea that we shouldn’t have to pay taxes.

This article reads as if there are parts of it missing. Kudos though.Simple logic seems hard to find these days. Reading the comments-I begin to think it has become impossible to remove politics from the workplace (separate economics and politics)

All those CEO’s who ran, and still run, America’s largest financial institutions have been very productive. Looking at the wealth they have accumulated is proof enough of that.
All one has to do now is convince Joe Bloe to work harder and accept less so that capitalism can flourish again.

Spin it till its up, spin it till its down… Anytime you combine the words “Government” and “Money” in a sentence it only equals one thing… Middle-Class + Screwed. Glad to see that President Obama realizes that investing OUR money in tangible assets instead of vapor-value that our financial and insurance institutions provide us is a better choice. Still22 is waiting for the smart people to show us the whole painful plan to get America right again.

@ ptiffany, thanks for the kind words, but it is important to keep the record clear that I am not an economist.

I have long written about, studied and taught economics issues. And in 1973 I studied at the Chicago School on a fellowship.

Before becoming a columnist I spent four decades as an investigative reporter at top newspapers and am now also an adjunct faculty member of the law and graduate business schools at Syracuse University, an author and lecturer and co-founder of a small lodging management company.

To posters here who suggest I should take an economics course:

I teach the principles and history of tax, property and regulation, all issues that are inherently economic.

I wrote two best-sellers on hidden and little known aspects of the economy (a third is nearly done), one of which was honored as Investigative Book of the Year by my peers. FREE LUNCH and PERFECTLY LEGAL were based partly on work for which I received many awards, some from accounting schools as well as a Pulitzer.

Several public finance economists sent me admiring private notes about the column you find lacking. How interesting that people who actually make a living in this area find my work not just accurate, but admirable, while others with no known track record, and using noms d’Internet, dismiss the same work out of hand.

I believe part of the solution is for us all to demand ….
Term Limits for all congress. It may go a long way in ending these comfy arrangements between politicos and the corporations. We need people in congress who want to make a difference, do a short stint, and get the hell out. The current status quo is for these people to make it a lifelong career. They are our version of royalty, once they’ve tasted the power and treatment they get in D.C., they never want to give it up.WE need a national movement to make term limits part of our constitution and re-invigorate our country.

I took your recommendation and read some, then skimmed other comments posted here, and must report that 99.9% have no clue about the operational, paradigm shift in monetary and fiscal accounting this nation experienced following the collapse of Bretton Woods in July, 1971.

The misinformed references to the government’s need for revenue, and the unfamiliarity with gov spending and net savings being mirror images for gov and non-government accounts. And the confusion over the function of taxation and borrowing not being needed for gov. to spend, all reflect an America hopelessly mired in gold standard and fixed exchange rate rubrics.

Someone needs to write a book about how America now pays for everything by marking Federal Reserve accounts up or down with currency values created by computer keystrokes.

And include a chapter on the post-1971 treatent of taxes. Don’t you think 99.9999% of Americans will simply deny the fact that their tax dollars don’t pay for anything in a fiat currency world where the gov. is sole issuer of the currency? But you can’t get many Americans to stop believing the lie in those road signs telling them “Your Tax Dollars at Work.”

Author Profile

Reuters columnist David Cay Johnston is the president of Investigative Reporters & Editors (IRE), an education organization with 4,200 members. A 13-year veteran of The New York Times, David won the Pulitzer Prize in 2001 for enterprise reporting that uncovered loopholes and inequities in the U.S. tax code. He wrote the best selling tax books Perfectly Legal, which won an IRE medal, and Free Lunch. His latest book, The Fine Print: How Big Companies Use "Plain English" to Rob You Blind, will be published in September.